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HMA 2Q Mixed, Profit Plunges

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Leading operator of general acute care hospitals, Health Management Associates ( reported second quarter adjusted earnings per share of 21 cents, matching the Zacks Consensus Estimate and surpassing the year-ago earnings of 20 cents per share. Adjusted earnings exclude 5 cents per share for a swap arrangement and mark-to-market orientation.

Net income at Health Management however declined 24% year over year to $36.9 million (or 14 cents per share).

Revenues

Revenues (prior to provisioning for doubtful clients) improved 20.9% year over year to $1,686.5 million, easily beating the Zacks Consensus Estimate of $1,638 million. The top line was driven by higher hospital admissions (on a continuing operations basis). Net revenues from same hospital (continuing operations) increased 6.1% to $1,299 million.

Operational Statistics

From a continuing operations perspective, occupancy declined to 39.6% in the reported quarter from 42.7% in the year-ago quarter. Admissions rose 7.1% while adjusted admissions increased 13.1% in the quarter. Average length of stay stood at 4.2 days, flat on a year-over-year basis. Surgeries were up 21.4%, patient days increased 5.5%, while emergency room visits rose 20.1%.

On same hospital basis, occupancy dipped to 40.3% in the second quarter from 42.7% in the prior year quarter. Same hospital admissions and adjusted admissions also declined 4.0% and 0.2%, respectively, while surgeries and emergency room visits increased 2.9% and 3.8%, respectively.

Margins

Same hospital adjusted EBITDA margin improved to 19.7% from 19.4% in the prior year quarter. Bad debt expense, as a percentage of revenues, moved up to 12.7% compared to 12.2% in the year-ago period.

The total of uninsured discounts, indigent/charity write-offs and bad debt expense as a percentage of the sum of net sales before provisioning, uninsured discounts and indigent/charity write-offs rose to 27.2% in the quarter from 25.8% a year ago. This metric indicates the aggregate extent of patient care for which Health Management is not reimbursed.

Balance Sheet and Cash Flow

Health Management ended the second quarter with cash, cash equivalents and available-for-sale securities of $156.3 million, down 32.3% year over year, with a considerable long-term debt of about $3,483.4 million, down marginally 0.2% year over year. The company generated cash flow (from continuing operations) of $228.9 million in the reported quarter, up from $156.1 million in the year-ago quarter.

Recent Developments

The company completed a joint venture transaction with respect to five Integris Health Oklahoma hospitals with a total of 218 beds, in the quarter. Per the transaction, Health Management owns 80% controlling stake in the five hospitals. It also manages the daily operations of these hospitals.

Outlook

For 2012, Health Management maintains its forecast for earnings in the band of 80 cents and 90 cents per share. The forecast excludes about $98 million (or 25 cents per share) of effect from mark-to-market orientation and interest rate swap as well as Medicare and Medicaid HCIT incentive payments in the range of $90 million to $120 million.

Health Management expects same hospital admissions to decline in the range of 1% to 3% for 2012 whereas, the same hospital adjusted admissions growth is expected to be in the range of -1% to 1%.

Health Management is engaged in the ownership and operation of general acute care hospitals in non-urban communities across the U.S. The company is an active acquirer of underperforming hospitals with a turnaround potential in high-growth markets. Health Management’s competitors, in niche markets include Community Health Systems ((CYH - Analyst Report) and Lifepoint Hospitals ((LPNT - Snapshot Report).

Health Management benefits from a gradual growth in admissions largely due to improvements in Emergency Room, sustained physician recruitment and service development. Moreover, it is well placed to expand margins from continuing operations and drive above-industry average earnings growth. While the debt burden remains sizeable, we are somewhat comforted that bad debt is no longer an area of urgent concern. Currently we are ‘Neutral’ on Health Management which is backed by a Zacks #3 Rank (Hold).

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